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Is late deposit of employer contributions an operational defect?


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I have a client who has just closed a U.S. DOL investigation for (very) late deposit of prevailing wage contributions.  They have now paid in all of the unpaid contributions and paid and allocated estimated interest based on a method approved by the DOL investigator, paid corrective distributions to former employees and they have received a closing letter. 

I expected that these late contributions would also be an operational defect that would require a VCP filing, and my client is prepared to do this.  My biggest concern had been whether the (DOL-approved) method of allocating interest would be acceptable to the IRS.  But, I am now wondering if there is in fact any operational defect, because I cannot find any plan provision that specifies when these contributions have to be made.  The plan has a schedule to the Adoption Agreement that lists the prevailing wage fringe benefit portion to be paid for each covered hour. The plan provision for Time of Payment of Employer's Contribution states:

"Unless otherwise provided by contract or law, the Employer may make its contribution to the Plan for a particular Plan Year at such time as the Employer, in its sole discretion, determines."

I don't think the "unless otherwise provided..." language incorporates the statute or contractual language by reference.  There is also plenty of typical plan language about when annual addition are credited, and when contributions must be made to be deductible for a plan year, or to be taken into account for testing, but those aren't really the issue here. 

State law does in fact require the contributions to be made quarterly, and there clearly has been a violation of this law.  

If the plan document doesn't have a deadline for the contribution, is there an operational defect when contributions are made later than the statutory or contractual deadline?    I had assumed the answer was yes.  But after parsing all the plan language relating to employer contributions, I am now thinking that the answer is no.  And that would mean there is no operational failure that could be corrected under VCP.   

Agree or disagree?  

 

 

 

 

 

 

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I tend to agree. IRS is concerned with following the document and the timing of contributions for deduction purposes, which you appear to be OK on. DOL is tasked with labor law and ERISA rights, and it's labor law where the client went afoul.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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True.  While I don't think this is an issue, I believe the contributions (even the earnings) would be tested a contributions in the non-discrimination tests.  The amounts being deposited are merely used to appease the DOL with respect to meeting the prevailing wage requirement.  If those amounts failed (and the DOL required earnings), then these are still 'plan contributions' from a non-discrimination perspective. 

Many plans have language (or at least should have language) that would preclude the possibility of an HCE receiving a prevailing wage contribution that could put a strain on the non-discrimination tests.  

Good Luck!

CPC, QPA, QKA, TGPC, ERPA

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Generally not an operational or other 401(a) failure absent plan language requiring contribution by certain date. These DOL corrections happen all the time. Usually within 2-year self-correction period, or "insignificant," anyway.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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If the plan document requires a deposit within a certain time, a late contribution might be an operational failure of the definitely determinable benefit rule, though I am not sure about that.  I don't believe every plan violation automatically disqualifies the plan.  It has to be a violation of a provision that is required by the qualified plan rules.  For example, assume a plan document names a committee as the administrator.  If the plan document says once a year every member of the committee must sing happy birthday to the committee chair, the plan is not disqualified if they forget to sing happy birthday.  Similarly, if the plan says the committee must meet four times a year, and they only meet twice, I don't see that as disqualifying the plan.  

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19 hours ago, Luke Bailey said:

Generally not an operational or other 401(a) failure absent plan language requiring contribution by certain date. These DOL corrections happen all the time. Usually within 2-year self-correction period, or "insignificant," anyway.

Unfortunately, the late contributions couldn't be considered insignificant.  Too many plan years, too long ago, and too many participants affected.  Non-discrimination isn't an issue here as no HCEs involved.  

I thought that the document didn't have a time limit for deposit, so there was no operational defect to correct.  However, I have learned that there was a change in documents during the applicable period. One document made no mention of timing, but the other (earlier) document states:

"All other Employer Contributions are to be remitted to the Trustee not later
than the date prescribed by law for filing the Employer's federal income tax return, including extensions thereof, for the fiscal year of the Employer."

I think this language really is intended to be for deductibility purposes, but it doesn't say that. 

14 hours ago, ERISAAPPLE said:

If the plan document requires a deposit within a certain time, a late contribution might be an operational failure of the definitely determinable benefit rule, though I am not sure about that.  I don't believe every plan violation automatically disqualifies the plan.  It has to be a violation of a provision that is required by the qualified plan rules.  For example, assume a plan document names a committee as the administrator.  If the plan document says once a year every member of the committee must sing happy birthday to the committee chair, the plan is not disqualified if they forget to sing happy birthday.  Similarly, if the plan says the committee must meet four times a year, and they only meet twice, I don't see that as disqualifying the plan.  

I've done many corrections over the years, but I had never before considered that not every failure to follow plan terms was a de facto operational failure.  The definitions of Operational Failure and Qualification Defect in EPCRS are somewhat circular (unhelpful).   The 'singing happy birthday' example does help put things in perspective!  A plan doesn't need to state when employer contributions for a plan year will be deposited (other than safe harbor, QNEC, etc.) and one of the applicable documents in fact doesn't specify, so it's hard to say it's part of the definitely determinable qualification requirement.   

I'm getting some comfort that no VCP is required here.  

 

 

 

 

 

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